Economist El-Erian: US Likely Facing Double-Digit Inflation by Summer

The United States will likely face double-digit inflation rates, potentially by this summer, before prices start to drop again, as Federal Reserve Chairman Jerome Powell is facing difficult decisions and has “no good policy options available,” economist Mohamed El-Erian said Sunday.

“Inflation is high and it will go higher because of what is happening in Ukraine,” El-Erian, the chief economic advisor at Allianz, said on CBS’s “Face the Nation.” “[Powell] has got to make a choice.”

This means Powell can “hit the brakes” by raising interest rates, which would allow him to “regain credibility but risk a recession,” or “tap the breaks,” by allowing inflation to grow, meaning “we have an inflation problem going into next year,” said El-Erian.

He estimates that with inflation already at 7.9%, the United States will “probably get very close or above 10% before we come down,” and if that happens, “it will happen in the summer and people will feel it” along with the impact of income losses.

“That’s why it is critical to avoid a recession,” he said. “We can’t avoid stagflation, lower growth, higher prices, but we certainly can avoid a recession and we can bounce back quickly.”

El-Erian also agrees with Treasury Secretary Janet Yellen’s prediction that there could be a full year of inflation ahead for the United States.

“We’ll have at least 12 months of uncomfortable inflation, something we haven’t had since the ’70s and ’80s,” he said. “That’s got to be problematic for the most vulnerable parts of our society. It hits food and gas particularly hard.”

The United States is in this situation, he added, because the Fed is “very late” in reacting.

Goldman Sachs earlier this month predicted the Fed will make seven rate hikes this year, reports The Street, but El-Erian said he does not think the economy will be able to support that happening.

“We are in this absurd situation,” he said “Last week when we got this 7.9% inflation, the Fed was still putting liquidity into this economy. That gives you a feel for how misaligned this policy has been.”

Meanwhile, there are political measures that can be taken to hold down inflation and wage losses, but they are stuck in Congress, El-Erian commented.

“You can do more to increase labor force participation so that wage pressure comes down,” he said. “That is about child care and about easing people’s way back into the labor force. You can do more to enhance productivity, and you can do more to remove supply bottlenecks. The administration has policies. Lots of them are stuck in Congress right now. “

Supply chain bottlenecks will also come into play, particularly as China is sticking to a “zero-COVID policy” through lockdowns, at a time when the omicron variant makes that difficult to implement, said El-Erian.

“They will have sequential lockdowns that will have spillovers to us,” he said. “We can be in a good house, but we live in a really tough neighborhood, and that’s why it is important to respond quickly. We can’t fall behind again on policies.”

The country must also be careful that another wave of inflation doesn’t happen through de-anchored inflation expectations, said El-Erian, explaining that that happens through wage demands.

“Basically, it is a simple story,” he said. “I, being the America worker, will go in and ask for compensation for past inflation. If I don’t have faith in my policymakers, I will also ask for compensation for future inflation. If that happens, we have that awful wage- price cycle.”

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